Bumping Up Against The Debt Ceiling: That Hurts!

Originally published on May 1, 2011 6:45 pm

Every few years — or even months — since 1917, Congress has voted to raise the national debt ceiling — the maximum amount the federal government is allowed to borrow.

"Basically it's served, for quite some time now, as a speed bump along the road," says Maya MacGuineas, president of the Committee for a Responsible Federal Budget at the New America Foundation. "Which just means government stops, looks at what it's been doing and says, okay, we're going to borrow some more, and they approve ... an increase."

Since 1962, the debt ceiling has been raised 74 times, and Congress has never voted down an increase.

The current debt ceiling is $14.3 trillion — and the country will hit that limit in the next few weeks. But this time around, some within Congress are pushing back.

"We're spending money we do not have, we're borrowing from our children and our grandchildren, some of whom are not yet born," says Sen. Mike Lee (R-Utah). "That doesn't feel right to me, especially when we're being asked to increase the debt ceiling without putting in place any kind of mechanism to make sure we eventually stop doing this."

Lee says he would vote for another increase in the debt ceiling only if the move is accompanied by a balanced-budget amendment phased in over five years, which would eventually prohibit the federal government from spending more than it takes in during any given year.

"I completely share the concern that if we continue to borrow, this is a terrible situation for the country and what we're doing right now is the wrong fiscal course to be on," MacGuineas says — but she differs with Lee on the immediate next steps.

If the debt ceiling is not raised, she says, an unprepared federal government could start to default on its loans.

"If we turn into deadbeat U.S.A., that just changes the whole way our system works," she says. "We would not be able to borrow on the same terms again, interest rates would shoot up and that would have an effect on the rest of the economy and it would likely put us back into a recession."

Her prescription: Lift the debt ceiling this time, but attach budgetary targets to get the government on the path to reducing the debt.

"This should be the speed bump that makes us change our ways," she says.

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GUY RAZ, Host:

When Congress reconvenes on Monday, several Republican lawmakers and even some Democrats say they won't let it happen. But why? Debt limits and consequences, that's our cover story today.

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RAZ: Unidentified Man: (Unintelligible).

SIMON JOHNSON: America is born as a country highly indebted.

RAZ: That's Simon Johnson. He's an economist at MIT. The Revolution, he explains, was financed by debt.

JOHNSON: Partly by borrowing from the French and partly by borrowing from the Dutch in order to buy weapons from them. Now, those debts were very mixed up. They were state level, they were currency that had just been issued. It was Alexander Hamilton who had the some people would say brilliant, some people would say problematic idea of consolidating this all and creating a national debt.

RAZ: And how much?

JOHNSON: In 1792, I'm looking at $80 million.

RAZ: Eighty million dollars.

JOHNSON: But after those wars, there was a determined effort by everybody, really, in political life to pay the debt down. And Andrew Jackson came in partly determined to really see the debt off the scene once and for all.

RAZ: Andrew Jackson, the president who inherited a debt of $58 million and took it down to just $33,000.

JOHNSON: Well, that was Jackson, and Jackson was determined to get rid of the debt.

RAZ: If the debt was 33,000 today, I would volunteer my entire net worth to singlehandedly pay it off. I would do that as a patriot.

JOHNSON: And I'm sure that you would be elected to high office on that basis. But in getting rid of the debt or certainly as part of what happened to the economy at that time, the economy slowed down. There was a big depression. And that undermined revenues. So the debt starts to go back up again.

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RAZ: From then on, the debt becomes this big, rolling wave: up, down, but mostly up. And by the middle of the Civil War, it tops a billion dollars for the first time.

JOHNSON: The success of the North was based in part on its ability to borrow.

RAZ: Now, fast forward to 1917. In two years...

JOHNSON: All of a sudden...

RAZ: ...the debt jumps almost $20 billion.

JOHNSON: ...the U.S. goes into the war. It sends a big army to Europe. This is extremely expensive.

RAZ: And by the end of World War II, it's almost $260 billion.

JOHNSON: That's a staggering number, and that's a tough number to get out of. But after Vietnam and with the disruptions of the 1970s, we turned some sort of corner. This appropriation process goes way off-track.

RAZ: So under President Reagan, the debt tops a trillion dollars. But the numbers really take off under President George W. Bush.

JOHNSON: It was partly tax cuts, with the belief that if you cut taxes, you get an economic boom.

RAZ: Five trillion when he takes office in 2000.

JOHNSON: It was partly war.

RAZ: Ten trillion by the end of George W. Bush's presidency.

JOHNSON: Those are expensive.

RAZ: And under President Obama...

JOHNSON: And, of course, it was the recession.

RAZ: Four trillion more in just two years.

JOHNSON: Most of the swing in the debt is caused by the slowdown, caused by the loss of tax revenue.

RAZ: Which brings us to today, a $14 trillion debt. Now, depending on how you calculate it, anywhere between 75 and 90 percent of America's total economic output.

JOHNSON: If you think, however, that we're going to hit stagnation, or if you think the foreigners are going to want their money back quickly, then we're going to have a much bigger problem.

RAZ: We asked Maya MacGuineas. She's the president of the Committee for a Responsible Federal Budget at the New America Foundation.

MAYA M: Basically, it's served, for quite some time now, as a speed bump along the road, which just means government stops, looks at what it's doing and says, okay, we're going to borrow some more.

RAZ: Right.

GUINEAS: And they approve a limit, an increase.

RAZ: And so over the years and over the decades, it's become kind of this simple procedure. Congress continues to approve increasing the debt ceiling. I read since 1962, they've done this 74 times. In the last 10 years alone, they've raised the debt ceiling 10 times. So traditionally, it has not been a big deal, right? Congress just says, all right, we're getting close to the debt ceiling. Let's raise what the government's allowed to borrow.

GUINEAS: That's right. It's not something that we usually do a whole lot of brinkmanship over, and it doesn't go to the last minute. But it is an excuse, where politicians will go to the floor, give heartfelt speeches about the need not to borrow so much and burn the future generation, all things which I think are reasonably good points, then go ahead, lift the debt ceiling and borrow some more.

RAZ: (Unintelligible). In the past, we have had depressions. We've had a Civil War. We had World War II. How is it that we are in a worse position with respect to the debt now than at almost any other time in our history?

GUINEAS: Well, we've gone through periods where the debt has gone up, and we've also gone through periods where the debt has gone down in the past.

RAZ: Right.

GUINEAS: But then when you came out of it, we would start to close that gap. We would pay some of that debt down. Unfortunately, we've lost that side of the equation in recent years.

RAZ: Why?

GUINEAS: And I think people are worried about stepping forward with the real ways to change or put forth the policies that would take us off this track because they think they'll get beaten up for making hard political choices. So we continue to deficit finance.

RAZ: But first, I want you to hear a conversation I just had with Senator Mike Lee, a Republican from Utah. He is one of the most vocal opponents of allowing the debt ceiling to be raised. Here it is.

MIKE LEE: We're spending money that we do not have. We're borrowing from our children and our grandchildren, some of whom are not yet born. And that doesn't feel right to me, especially when we're being asked to increase the debt ceiling without putting in place any kind of mechanism to make sure that we eventually stop doing this.

RAZ: Now, if the debt ceiling is not raised, as you know, the Treasury Department is warning that it will cripple our economy, that the U.S. will essentially do what it has never done: It will default on its loans.

LEE: I know of no reason why he wouldn't do that, and I find it strange that that threat is made.

RAZ: But why would countries be willing to buy U.S. Treasury bonds if there was a threat that even if it would only be temporary, there'd be a threat that they would become worthless?

LEE: And so what I'm saying is before we take that next step and just blindly increase the debt limit, we ought to look seriously at reforming the way in which we spend money and putting in place a balanced budget amendment so as to require Congress to change how it spends so that it's not this reflexive impulse to just raise the debt ceiling again and again and again until we get to the point where we can't get anyone to buy our debt.

RAZ: What could the consequences be of not allowing the debt ceiling to rise?

GUINEAS: But I don't at all share his confidence that if we didn't lift the debt ceiling, we wouldn't have a default. So there are a lot of complicated factors in how you pay money if you haven't increased the debt ceiling, and these are the kind of complications you don't want to throw into already jittery debt market.

RAZ: Well, break it down. I mean, when you say default, what does that mean? Does that mean that all of a sudden, China can't collect on its debt and other countries? And what does that actually mean for our economy?

GUINEAS: At the same time, we shouldn't just lift the debt ceiling and say, oh, we'll figure all this out tomorrow. We should attach to that some reasonable changes, some savings, some budgetary mechanisms to get us on the right path, and this should be the speed bump that makes us change our ways.

RAZ: Maya, thanks so much for coming in.

GUINEAS: Hey, thank you very much. Transcript provided by NPR, Copyright NPR.